Banks squeeze loyal borrowers to boost profits

Banks have more than quadrupled the gulf between their best fixed-rate mortgage deals and the standard variable rates they charge long-standing borrowers.

Figures in an official report lay bare how, to boost their profits, lenders are squeezing borrowers who fail to shop around at the end of their mortgage term.

While major banks have slashed fixed rates for new customers, they have failed to reduce rollover rates for borrowers when their deal expires.

It means the gap between the best rates offered to new customers and the standard variable rate (SVR) has ballooned nearly five-fold, from 0.57 per cent to 2.71 per cent, over the past six years, according to figures published in the City watchdog report.

Homeowners beware: Lenders are squeezing borrowers who fail to shop around at the end of their mortgage term

This money-making ploy by lenders is hammering those homeowners who are not as confident when it comes to shopping around or who do not realise they can get a better deal elsewhere.

It can mean they end up paying an extra £6,000 over the course of two years.

Experts have accused building societies and banks of profiteering and treating customers as cash cows. With interest rates at a record low, there is no excuse, they say, for failing to reduce their standard variable rates.

The majority of mortgages on offer today have a short-term introductory deal. They typically charge a fixed interest rate for two or five years, after which homebuyers are rolled on to what is known as the lender’s SVR.

At this point, most borrowers then switch to another cheap deal. But a significant number stay where they are and end up paying far more than they need to.

The average SVR for someone with a 25 per cent deposit is around 4.75 per cent. On a typical £150,000 home loan taken over 25 years, monthly repayments would be £855, according to figures from the mortgage broker London & Country.

But if the same borrower took a top 1.49 per cent two-year fixed-rate deal, they would pay just £599 a month — a saving of £256.

It means that over a two-year term, borrowers on the SVR would pay an extra £6,144. Even if they remained on their lender’s default rate for just six months before switching, they would still pay £1,536 more than they needed to.

Standard variable rates also vary hugely depending on the lender.

First Direct, for example, charges 3.94 per cent, while Yorkshire Building Society’s SVR is 4.99 per cent.

On a £150,000 home loan, this is a difference of £89 a month.

There are around two million UK homeowners sitting on their lender’s standard variable rate, according to the Financial Conduct Authority (FCA).

Of these, at least 800,000 could switch and would benefit from doing so. Another 30,000 are, in effect, trapped on expensive deals.

Many of these so-called ‘mortgage prisoners’ took out loans before the financial crisis and cannot switch deals because they do not meet the new, strict affordability rules introduced in 2014 after the financial crisis.

Others live in areas where house prices have fallen and so do not have enough equity in their homes; or they have an interest-only loan, which few lenders still offer.

The number of customers on lenders’ standard variable rates has fallen in recent years as fixed rates have plummeted.

The gap between the best rates offered to new customers and the standard variable rate has ballooned nearly five-fold, from 0.57 per cent to 2.71 per cent

Yet while those on standard variable rates with major lenders make up just 14 per cent of average mortgage balances, they account for a whopping 30 per cent of the income firms make from mortgage interest.

In its report, the FCA said it would be investigating the extent to which lenders rely on the profits that are generated by customers on standard variable rates.

The growing spread in prices, combined with a smaller standard variable rate customer base, could indicate that firms’ profits are becoming concentrated on a narrower group of consumers, says the report.

‘Major banks rely on customers on standard variable rates for a substantial amount of their income. We are interested in understanding the extent to which lenders rely on these customers as part of their business model.’

Dominik Lipnicki, of the mortgage broker Your Mortgage Decisions, says: ‘Banks are clearly profiteering. They are using people’s inaction to line their own pockets.

‘There are far too many people languishing on their lender’s standard variable rates — and banks hope they stay there because the difference in profit margin is staggering.’ David Hollingworth, of L&C Mortgages, says: ‘Borrowers who fail to keep their mortgage deal under review are burning money.

‘The FCA report shows that standard variable rate borrowers can be something of a cash cow for lenders at a time when there are ultra-low rates on offer.

‘With ongoing speculation around future rate rises, locking into a fixed rate not only offers substantial savings, but there’s the additional benefit of being able to protect yourself against sudden price hikes.

‘Lenders have got better at offering existing customers a deal to move on to but, in such a competitive market, it’s important to hold that up against the rest of the market to ensure the best ongoing value.’

A spokeswoman for trade body UK Finance says: ‘The Mortgages Market Study considers this topic in more detail and we continue to liaise closely with the FCA.’

v.bischoff@dailymail.co.uk

Mortgage Affordability Calculator

Find out how much you can afford to borrow with This is Money’s mortgage affordability calculator, and see the difference between capital repayment and interest-only deals.